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JB Oxford's CEO reaped millions while red ink flowed, SEC probed

Los Angeles Business Journal, August 30, 2004 by Kate Berry

Even as the Securities and Exchange Commission prepared civil fraud charges against JB Oxford Holdings Inc. and three executives last week, the firm's chairman and chief executive has been selling off the company in pieces at fire sale prices--and pocketing millions.

Christopher Jarratt, a 42-year-old investor based in Nashville, Tenn., gained control of the Beverly Hills brokerage in 1998 by purchasing $2 million of its debt. Jarratt was not among those charged.

Just two weeks ago, while the SEC was preparing to file charges, JB Oxford sold its National Clearing Corp. subsidiary to North American Clearing for $100,000 and future payments of up to $2.5 million, according to SEC filings.

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That sale came just two months after JB Oxford sold its online brokerage business, with 50,000 retail accounts, to Ameritrade Inc. for up to $26 million. (The final amount depends on the number of accounts that remain open.)

As part of that deal, Jarratt's private investment firm, Third Capital Partners LLC in Nashville, agreed to convert its holdings of $5.4 million in convertible notes into roughly two million shares of JB Oxford stock and to vote those shares in favor of the transaction.

With the sale of its two subsidiaries, JB Oxford currently has no source of income and no business, although it retains a listing on Nasdaq.

Jarratt, who did not return several calls seeking comment, put himself in the top spot at JB Oxford six years ago alter purchasing the company's subordinated debt. At that time, he named Jamie Lewis, a lawyer at Third Capital, as president and chief operating officer at JB Oxford, even though Lewis had no previous experience in the securities industry. Jarratt also stacked the five-member board with insiders, including himself and Lewis.

Insiders charged

Last week, Lewis and two other JB Oxford executives, Kraig Kibble and James Lin, were charged by the SEC with fraud and illegal mutual fund trading. The lawsuit was filed in U.S. District Court in Los Angeles.

The case is expected to go to trial and the SEC is seeking unspecified damages. It is likely to also seek revocation of the defendants' licenses, which would bar them from practicing in the securities industry.

"We intend to seek significant monetary sanctions commensurate with the gravity of this conduct from both JB Oxford Holdings and NCC," said Randall Lee, the SEC's regional director.

Regulators claim the executives engaged in a scheme to process as many as 25.000 market-timing and late trades from June 2002 to September 2003. Regulators characterize "late trading" as analogous to betting on a horse race after it is already complete. "Market timing" involves shifting money quickly in and out of mutual funds to capitalize on changes in the market.

A former SEC lawyer who didn't want to be named said the case against JB Oxford and its executives appeared to be strong--particularly the allegations of late trading, which can be elevated to criminal charges because the executives allegedly used fake account numbers and fake broker numbers with the intent to deceive mutual fund companies from discovering the trades.

At the same time, JB Oxford was receiving numerous "kick-out" letters from institutional clients such as Fidelity Investments, indicating that some of its trades were rejected because of "market timing," "short-term trading," or "excessive trading"--terms typically used in mutual fund prospectuses stating a fund's market tinning policy.

As part of the fraud, the executives allegedly used fake account numbers to make trades in mutual fund accounts for clients such as Canary Capital Partners hedge fund and an unnamed brokerage firm in Boca Raton, Fla.

Canary Capital is the New Jersey hedge fund that has played a key role in New York Attorney General Eliot Spitzer's investigation into illegal mutual fund trades. Last September, Canary paid a $40 million fine to settle its inquiry.

For JB Oxford, the penalties are expected to be much smaller.

The SEC is likely to seek disgorgement of the nearly $1 million earned by National Clearing for arranging the late trades and market tinning transactions. Some of that money could come directly from Lewis because he signed Oxford's 2002 and 2003 quarterly statements with the SEC. Lewis left JB Oxford in April. His lawyer, Matthew Dontzin, said his client would "vigorously defend himself."

Previous problems

JB Oxford has been swimming in red ink for some time, losing more than $15 million in the past two years. JB Oxford's executives were well known for taking lavish perks.

Jarratt received a consulting fee of $85,000 a month, as well as 9 percent interest on the $5.4 million in subordinated debt he owned. His company. Third Capital, was paid $918,000 in 2002, $994,500 in 2001 and $1.02 million in 2000 for "professional and advisory services," and more than $200,000 a year in expenses. Directors of the company were paid $40,000 a year.

Business Services Industry

JB Oxford's CEO reaped millions while red ink flowed, SEC probed

Los Angeles Business Journal, August 30, 2004 by Kate Berry

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